Whoa! These 3 Stocks Thrive in Sequestration

Since sequestration kicked in on Saturday and The End of The World As We Know It was supposed to materialize, the Dow Jones Industrial Average has packed on an additional 164 points, an almost 1.2% jump from where it closed on Friday. It was up 126 points yesterday alone and pushed the index to a new five-year high.

Had we known massive spending cuts would generate such market enthusiasm, we could have allowed sequestration to begin when it was supposed to at the start of the new year.

The three stocks below, however, had their own causes to celebrate, but resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.

Company

% Gain

MGIC Investment

27.8%

Dyax

19.6%

Cree

14.4%

Insuring housing's futureThey were some of the biggest casualties of the housing market implosion, but today, mortgage insurers are the market darlings, the epitome of the industry's nascent recovery, and its potential as the government scales back its dominance of the mortgage industry. Both MGIC Investment and Radian Group have soared in value over the past week with the former more than doubling in price and the latter up a not-so-insignificant 24%.

Both companies have used the opportunity to raise more cash. Radian started the funding cycle by raising $689 million selling stock and notes while MGIC followed with a dual set of announcements that it would float 135 million shares of common stock and $350 million in convertible notes that come due in 2020.

Analysts say the clouds have parted for the insurers, and Barclays thinks it's no longer how much further down they'll fall, but rather "how much upside there still is despite the big move since bottoming in August." The industry could return to normalized earnings by 2015 as it moves toward profitability and the high-risk legacy business expires, but of the two, MGIC is seen as the better bet by analysts because Radian has greater capital needs.

Seems to me if the FHA is trying to limit its risk by limiting the scope of its exposure, that could mean the private mortgage insurers will be incurring it. In the short term, this may benefit MGIC, but longer term, we may find ourselves right back where we were.

License to kill Biotech Dyax also jumped after analysts weighed in on its prospects with Jeffries Group setting a $6 per share target on its stock.

While it might seem to be a bit of too little, too late when it comes to Dyax, since it was one of the best performing stocks in the market last year having surged 156%, the Jeffries analyst says there's still a lot of room to run yet because of its treatment for the orphan disease hereditary andioedema. Kalbitor had sales of $39.8 million in 2012, up 74% from the year-ago figure, and management expects sales to grow as much as 40% this year.

Jeffries believes Dyax's stock price has also not yet had factored in the potential wealth-generating capabilities of its licensing and funded research program. Dyax has 13 royalty and milestone-eligible candidates in clinical trials, three of which are in phase 3 testing and four are in phase 2 development.

Although Dyax shares have hit a new 52-week high and are at levels not seen since 2010, the stock is still well below the all-time high of $54 a share reached back in 2000.

A bright ideaLED lighting specialist Cree didn't need analyst assistance to cause its stock to spike; it only needed to break through the $10 barrier. It introduced an LED light bulb that will sell at Home Depot for $9.97 a bulb, believing the 40-watt replacement LED will be the catalyst that finally pushes the consumer away from incandescents.

The technological advancement has always been considered the next progression in lighting. Compact fluorescents -- those curly pigtailed bulbs -- were really just a way station on the path toward the greater efficiency of LEDs. Despite CFLs containing toxic levels of mercury that makes disposing of them hazardous, it didn't stop the dim bulbs in Congress from banning high-wattage incandescents as a means of pushing the consumer forward. In a misguided attempt to be green, politicians probably created more environmental risk, even though companies like Cree were already developing the technology to bring the price of LEDs down.

Price was always the one sticking point for the technology to gain mass consumer appeal, and Cree's breakthrough of that barrier could indeed be the game-changing event that tilts the field in its favor.

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